Riding Into The Sunset

By

Jonathan R. Laing

Updated Feb. 15, 1999 12:01 a.m. ET

Order Reprints

Print Article

Text size

Y ou'd never know that 63-year-old Jack Welch is winding down his two-decade tenure as chief executive of
General Electric Co
. During a recent early-morning interview in his opulent 53rd-floor office suite in the landmark GE Building in Manhattan, Welch's manner was as high-voltage and intense as ever. Words tumbled from his mouth in staccato bursts, elided Rs betraying his Massachusetts roots. At times, he would whack his interviewer on the leg to emphasize a point. And periodically, he'd leap to his feet and scuttle to the door to ask his executive assistant to fetch yet another document amplifying the topic under discussion.

"The energy is palpable in this organization," he rasped at one point. "We're big but agile and not afraid to take swings at the plate that smaller companies just can't risk. Last year we did 108 acquisitions for $21 billion all over the world. Why, yesterday the leaders of one of our businesses came to me with three acquisition ideas that were so exciting that I almost jumped out of my shoes. I told them to do the deals tonight if they could." Just last week, GE's NBC unit was rumored to be in talks to join forces with an Internet company.

Such rapid-fire dealmaking has allowed Welch to get one of the nation's oldest and largest companies to produce consistently rising earnings for nearly 20 years running. His impressive record helps explain why GE was named the world's most admired company last year by both Fortune magazine and London's Financial Times.

With less than two years to go in his GE career, Welch has no intention of letting his record slip. Right now Wall Street analysts are almost all looking for annual earnings growth of 14% or better for this year and next from the $9.3 billion, or $2.80 a share, reported for 1998. Revenues have been running at about $100 billion a year.

The company's boosters claim that Welch will easily achieve his stated goal of 14% earnings growth. They point to huge order backlogs in various GE manufacturing operations, ranging from medical imaging equipment to power turbines to railroad locomotives. Moreover, productivity is surging throughout the company, and GE Capital Services, the all-important finance operation, is expected to reap large gains on assets that were bought on the cheap in Europe in the early 'Nineties and more recently in recession-wracked Asia.

"What you're going to see over the next two years at GE is the 'Jumpin' Jack Flash Show.' It will be like the grand finale to a Fourth of July show where they fire everything off nonstop for the last two minutes," predicts Nicholas Heymann, Prudential Securities analyst and a onetime GE employee.

Yet it's still anybody's guess what will happen after the pyrotechnics of the Welch era subside. Will the great GE growth machine that Welch has so ably run since 1981 continue to pump out double-digit annual profit growth? Welch, of course, and many Wall Street analysts like Heymann expect no decline in performance. Nonetheless, certain questions obtrude.

Succession, of course, remains the paramount issue. Cautionary tales abound on that score. It's no secret that
Coca-Cola
lost its fizz after the death of longtime Chairman Roberto Goizueta. Likewise,
Rubbermaid
hit the skids after highly respected CEO Stanley Gault stepped down.

Merrill Lynch analyst Jeanne Terrile verbalized such concerns in a recent report, using a confessional tone unusual in such offerings: "Investors have understandably dreaded [Welch's] retirement. We won't say we have a different view, but we are beginning to feel much more comfortable with the succession issue than we expected to." Clearly, one reason for her rising comfort level is GE's depth of management strength. Under Welch, the company has been known for nurturing talented executives in a rigorous meritocracy where performance is lavishly rewarded and failure mercilessly punished.

Still, Welch's size 10 shoes will be difficult to fill, no matter how adept his successor. During Welch's long tenure, he has played with aplomb a multiplicity of roles necessary to survive and prosper in an increasingly Darwinian global marketplace. He has been at once the consummate agent of change and upholder of traditional core values, cajoler and consoler, disciplinarian and cheerleader, prudent allocator of capital and daring risk-taker and, at times when competitive exigencies demanded it, cold-blooded executioner. As an old acquaintance points out, no one can be more "seductive" or more polished at the "theater" of the executive suite than Welch.

Perhaps hardest to replicate in any successor will be Welch's extraordinary grasp of business realities. He saw the need in the early 'Eighties to dismantle GE's then-highly successful but ultimately sclerotic organization structure. He cut costs long before restructuring and downsizing became the rage. He had the guts to dump various birthright GE businesses like small appliances and television manufacturing, concentrating instead on more profitable operations like medical equipment, turbines and jet engines.

Lastly, Welch was well ahead of the curve in sensing, three or four years ago, the deflationary tide about to engulf global markets. He was ready with programs to procure more parts abroad, step up cost-cutting and do more service business. All these moves helped to offset weak product prices and expand profit margins.

One factor that could hurt GE's performance in the years ahead is the resignation in December of 57-year-old Gary Wendt as Chairman and CEO of GE Capital Services. Eccentric and mercurial, Wendt always managed to see to it that his division was a major contributor to GE profits, last year chipping in 41% of the company's overall earnings.

A mong other things, Wendt has proved a nonpareil bottom-fisher. He personally negotiated some 300 acquisitions allowing his operations to acquire billions of dollars of assets on the cheap. These ranged from huge fleets of railcars and jet aircraft in the 'Eighties to commercial real estate from the Resolution Trust Corp. in the early 'Nineties. In the past year and a half, GE Capital has bought nearly $20 billion of Asian life-insurance, consumer-finance and equipment-leasing assets. Wendt also proved adept in leveraging GE's rock-bottom cost of capital to extract outsized returns from businesses like private-label credit cards and auto leasing.

"GE Capital certainly has a deep bench of talented executives who really know how to execute, but I'm concerned that the business will suffer ultimately from losing Gary Wendt's strategic vision," worries Bill Fiala, an analyst at Edward D. Jones.

In addition, future profit growth at GE will depend on further cost-cutting and margin enhancement. And on that score, Welch and GE have been putting their faith in an arcane program borrowed from
Motorola
and
AlliedSignal
, called Six Sigma. The theory is that almost any process, whether a production line or an order intake system, can be mathematically measured and refined so that errors or defects can be reduced to the statistically de minimus frequency of Six Sigma, or 3.4 defects per million opportunities. Achieving such levels results in enormous cost-savings from reduced scrappage, rework and warranty costs and stronger revenue growth from customers who presumably appreciate higher-quality, lower-priced products.

GE claims that Six Sigma yielded as much as $1 billion in benefits last year over the $450 million annual costs of running the program. Six Sigma boosters at GE claim the company will eventually realize more than $10 billion in annual cost-savings and additional revenues from the new discipline. Six Sigma has already been credited with a recent surge in productivity at the company and a startling rise in GE's operating margin from 13.6% of sales in 1994, the year before the company embarked on its Six Sigma initiative, to 16.7% last year.

Indeed, GE reports these days read like old Chinese Communist tracts extolling the latest prodigies of worker ingenuity and output. Take, for example, the GE Plastics plant in Singapore that was mentioned in the latest GE annual report for devising a method to reduce the lead time by 85% for matching colors of GE resins to customer requirements. It's not exactly comparable to Thomas Edison's discovery of the light bulb.

One at least wonders whether Six Sigma, merely a New Age version of the old statistical process control theory from the 'Fifties, may in part be a promotional ploy to snow customers and Wall Street alike. It can be argued that GE's profit margins may have risen somewhat less as a result of Six Sigma and more because of the company's change in product mix, strong volume growth and a strategic $2.3 billion restructuring charge taken in late 1997, in part to close redundant facilities and shift production to cheaper labor markets. In any case, the law of diminishing returns should set in for Six Sigma within a few years after most of the low-hanging fruit has been picked.

GE also points to the growing importance of its highly profitable service business, which covers everything from its huge installed base of power turbines, locomotives, jet engines and medical imaging equipment to GE Capital's pellmell growth in financial services. GE officials say this booming service segment insulates the company from the twin scourges of recession and deflation. By the year 2000, services are expected to account for some 75% of GE's revenues, up from around 70% now and from just 15% back in 1980.

One might quibble with these service revenue estimates just a tad. For a supposedly 100% service revenue provider, GE Capital sure seems to own a lot of hard assets, like 500 airplanes, more than 180,000 railcars, and huge fleets of cars and trucks. The operation even owns the Montgomery Ward retail chain, thanks to a leveraged buyout gone bad.

Whatever the case, margins in the service industry are unlikely to remain as succulent as at present. At the company's latest annual management meeting in Boca Raton, Florida, GE officials discussed the threat posed by "gypsy" low-tech service companies that were trying to poach on GE's customer base. And easy comparison-shopping afforded by the Internet is likely to cannibalize margins in many of the consumer financial-services markets, such as annuities and other consumer insurance and investment products that GE Capital is increasingly active in. Lastly, deregulation will allow banks and other financial institutions to compete on more even terms with GE Capital in the future.

W elch professes scant concern over the question of succession. "We've developed an incredibly talented team of people running our major businesses, and, perhaps more important, there's a healthy sense of collegiality, mutual trust and respect for performance that pervades this organization," Welch averred. Both he and a special board committee have been independently evaluating the various top officers for some time as the managers have been cycled purposely among various GE operations to gain exposure to the empire and be tested under different circumstances.

Beyond repeating endlessly in interviews that his successor must be strong in the "four Es" -- energy, ability to excite, edge and execution -- Welch is playing his cards close to the vest. He claims that neither he nor the board know yet who will win the GE sweepstakes. And the answer isn't likely to come until early next year when GE will likely tip its hand by elevating several of the top candidates to some expanded role.

But one thing Welch is adamant about is selecting a successor who is young enough to have a long run in the top spot. It may not be for a 20-year tenure, as Welch had. "Perhaps that's too long for most people to keep looking at things with fresh eyes," Welch explains. Yet he feels that a CEO should remain in place a minimum of 10 years and preferably longer. According to Welch, it takes that long for a leader to overcome and fix the inevitable rookie mistakes, get the strategic fundamentals right and mold an organization that will buy into the leader's values. Shorter tours of duty, in Welch's opinion, invite ill-thought-out, "whiz-bang" strategic shifts.

Welch, in fact, concedes that his performance was less than first-rate during his first decade at GE's helm, though by the late 'Eighties he was already receiving rave reviews from Wall Street and the financial press. "I took way too long to de-layer GE and take its costs down to where they had to be to get us globally competitive. Everybody back then was calling me Neutron Jack, but the truth was that as a guy in my mid-to-late 40s I lacked the confidence to move as decisively as I should have. I was too afraid of breaking the glass," he recalled somewhat ruefully.

He certainly wasn't the world-class performer in the 'Eighties that he since has become. The management tome on visionary companies, Built to Last by management consultant James Collins and Stanford University Business School professor Jerry Porras, points out that compared to other management tenures in GE's history going back to 1915, the first 10 years of the Welch Era, from 1981 to '90, ranked only fifth out of seven as measured by pre-tax return on equity. Welch's 1980s run did rank second out of seven in stock returns relative to the general market, however.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.